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Why Southern Copper Is One of the Lowest Cost Producers

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Lowest cost copper producer

Copper producers don’t have much control over copper pricing. The prices are decided by market dynamics. When copper prices start falling, high-cost producers become unprofitable much sooner than peers that are placed better on the cost curve. Low-cost producers are able to tide over economic cycles better.

Moreover, pressure builds on miners to close their high-cost mines when commodity prices fall. In this part, we’ll explore how Southern Copper’s (SCCO) unit production costs compare to other major copper producers.

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Unit production costs vary across copper producers

Unit cash costs vary across copper producers, as you can see in the chart above. Note that these costs are after by-product credits. Freeport-McMoRan (FCX) had unit cash costs of $1.50 per pound in 2Q15 after all byproduct credits. Teck Resources (TCK) had similar cash costs at $1.49 per pound in 2Q15. Codelco, the world’s largest copper miner, had cash costs of $1.36 per pound in 1Q15.

Together, Freeport and Teck Resources form ~1.03% of the iShares North American Natural Resources ETF (IGE).

Southern Copper (SCCO), which is among the lowest-cost copper producers, had unit cash costs of $1.12 per pound in 2Q15. Southern Copper’s earnings haven’t fallen as much as its peers by virtue of being nimble on costs.

Why Southern Copper has less unit production costs

  • Southern Copper’s copper mines are in Peru and Mexico where labor costs are less than the United States. In contrast, Freeport-McMoRan (FCX) has significant mining assets in the United States (SPY).
  • Southern Copper has higher byproduct credits compared to some of its peer companies.
  • Currently, all of Southern Copper’s major mines are open pit. As we’ve already seen, open pit mines generally have less unit production costs.

Southern Copper uses an SX-EW (solvent extraction and electrowinning) process for a significant portion of its production. We’ll discuss this in detail in the next part of this series.

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